Watch for U.S. Dollar 'Jawboning' from Officials

As long as the Euro continues to surge higher (and the U.S. dollar careens lower), the bullish commodity markets are likely to do the same. Keep in mind, too, that the Euro is also in a mature bull market move.

It could also be argued the U.S. dollar is most important currency for traders to watch, via the U.S. dollar index futures. However, the reason I choose the Euro is that it's more liquid in currency futures trading than is the U.S. dollar index futures. And in the cash FOREX trading market, the euro currency-U.S. dollar is a major currency pair traded by FOREX traders.

The Impact of Intervention

There is a phenomenon that could seriously impact the euro and the value of the U.S. dollar in the coming weeks, or sooner. It's coordinated central-bank foreign-exchange market intervention. This phenomenon has not occurred in any significant fashion since the mid-1990s.

Central bank intervention in currency markets occurs when central bankers from the major industrial countries act in unison to try to influence the value of one currency against other currencies -- usually the U.S. dollar.

It has been and still is the official policy of the government of the United States of America to have a "strong dollar." U.S. Treasury Secretary Henry Paulson reiterated such just Thursday. Most economists and analysts would agree that at present, the value of the U.S. dollar vs. the other major currencies could not be considered "strong."

If the U.S. dollar continues to slump (and the euro rise), then what is likely to occur sooner rather than later is more U.S. government officials "jawboning" and trying to talk up the value of the greenback. That tactic is not likely to work.

What comes next would likely be coordinated central bank intervention in the world currency markets -- done by buying or selling huge sums of currencies on the world market. In this case, the central banks would likely dump other major currencies on the world market and buy up U.S. dollars.

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At time of publication, Wyckoff had no positions in the stocks mentioned, although positions may change at any time.

Jim Wyckoff is a senior market analyst for TradingEducation.com a free educational Web site. In addition, Wyckoff writes a blog offering current market commentaries every morning on TraderBlogs.com. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Wyckoff appreciates your feedback; click here to send him an email.